When the rest of the world is mad we must imitate them in some measure.

John Martin, 1720

This is my forty-sixth monthly portfolio update. I complete this regular update to check progress against my goal.

Portfolio goal

My objective is to reach a portfolio of $2 180 000 by 1 July 2021. This would produce a real annual income of about $87 000 (in 2020 dollars).

This portfolio objective is based on an expected average real return of 3.99 per cent, or a nominal return of 6.49 per cent.

Portfolio summary

Vanguard Lifestrategy High Growth Fund	$724,599
Vanguard Lifestrategy Growth Fund	$41,459
Vanguard Lifestrategy Balanced Fund	$78,259
Vanguard Diversified Bonds Fund	$111,658
Vanguard Australian Shares ETF (VAS)	$224,190
Vanguard International Shares ETF (VGS)	$63,441
Betashares Australia 200 ETF (A200)	$228,870
Telstra shares (TLS)	$1,481
Insurance Australia Group shares (IAG)	$5,549
NIB Holdings shares (NHF)	$4,896
Gold ETF (GOLD.ASX)	$120,877
Secured physical gold	$19,452
Ratesetter (P2P lending)	$8,326
Bitcoin	$168,470
Raiz app (Aggressive portfolio)	$16,979
Spaceship Voyager app (Index portfolio)	$2,772
BrickX (P2P rental real estate)	$4,459
Total portfolio value	$1,825,737 (-$23,159)

Asset allocation

Australian shares	41.7%
Global shares	22.6%
Emerging market shares	2.2%
International small companies	2.8%
Total international shares	27.6%
Total shares	69.4% (-5.6%)
Total property securities	0.2% (+0.2%)
Australian bonds	4.4%
International bonds	9.0%
Total bonds	13.4% (-1.6%)
Gold	7.7%
Bitcoin	9.2%
Gold and alternatives	16.9% (+6.9%)

Presented visually, below is a high-level view of the current asset allocation of the portfolio.

Comments

The portfolio has suffered a modest decline over the past month and fallen in value by $23,000. This has broken a five month period of overall recovery and growth, with the portfolio experiencing a contraction of around 1.3 per cent.

These falls have occurred simultaneously across major components of the portfolio, including Australian and international shares, gold and Bitcoin. This is a relatively rare occurrence.

New investments this month were made to the Vanguard Australian Shares ETF (VAS) to maintain the target allocations.

Over coming weeks, third quarter distributions from the three equity ETFs held (VAS, A200 and VGS) will also be paid and re-invested. At present these appear likely to total around $3600, which is around 40 per cent lower than past historical distributions for the same period.

Impact of volatility and distance to goal

The sharp volatility experienced through this month has reinforced the growing impacts of daily and monthly fluctuations at this stage of the journey.

The graph below sets out the monthly volatility in portfolio movements experienced over the past twelve months.

Yet what is not obvious from this graph is how this level of monthly volatility assumes a greater significance later in the journey to financial independence. Two factors compound this impact:

• First, the portfolio is larger than at an earlier stage of the journey, simply meaning mathematically that any market-based variation is going to be larger in absolute terms.

• Second, these larger fluctuations occur at a time where the remaining distance – or ‘dollar gap’ – to the target portfolio level is smaller.

One way to see both factors at work is to look at the impacts of two illustrative changes in equity market prices at two different points in time.

The table below shows the relative impacts of two different equity market price changes at the commencement of this record in early 2017 and now.

Interaction of equity market changes and target: a comparison

Event	January 2017	September 2020
2% equity price increase	+$12,600 or closing 1% of gap to the FI target	+$25,300 or closing 7% of gap to the FI target
5% equity price increase	+$31,600 or closing 2.5% of the gap to FI target	+$63,300 or closing 18% of the gap to FI target

In short, closer to the end of the journey, even relatively small movements in overall equity prices of 1 or 2 per cent can make an outsized impact on progress. Indeed, larger movements, for example over a month, can meaningfully close the gap to the the target portfolio value. Conversely, of course, market falls can quickly extend this gap.

Investing at the meeting of the tides?

Equity markets have increased in volatility over the past two months, with market measures such as the VIX indicating broad expectations of more volatility ahead.

Yet current monetary policy responses are to some extent actually masking the underlying level of volatility. For example, this recent study estimated that without the impact of lower US interest rates, US equity markets would be 18 per cent lower. Meanwhile, the US Federal Reserve and pre-eminent financial economists continue to probe just what is driving interest rates so low and observe the potential for the ‘scarring’ effects of COVID-19 to lower interest rates for decades to come.

One argument is that an impact of this is to make safe risk-free assets more valuable than at other times. Yet there are other potential explanations for low rates. Another possible explanation relates to this time of uncertainty over the emergence of inflation or deflation. In this uncertain phase – this meeting of the tides – financial claims on future cashflows or assets may at the margin be temporarily serving as a cash substitute. In fact, they may continue to do so at least until clearer resolution of the question of inflation or deflation emerges.

This position of potential stored dynamic energy, combined with the opportunity costs of avoiding choices, make this moment challenging for investing. For example, in this interview, the author of the best-selling history of market manias and crashes, Devil Take the Hindmost, remarkably observes that ‘prudent investing is impossible these days‘. Such stark declarations should give pause and turn our attention to the history of markets.

Not all that is to be found there is reassuring. For instance, in July 2007, just prior to the full emergence of the Global Financial Crisis, the CEO of US bank Citigroup remarked: ‘As long as the music is playing, you’ve got to get up and dance. We are still dancing‘. Citigroup was subsequently bailed out by the US government, which guaranteed its debts and took a large equity position.

Lightening load – reductions in index fund fees

This month Vanguard Australia announced a substantial change in fees and product arrangements which affect their retail fund offerings.

Most importantly for the FIRE portfolio, this substantially lowers overall fees charged on existing retail fund holdings. The changes remove a previous tiered approach that saw relatively high fees for lower balances, and replace a range of existing fees with a flat fee of 0.29 per cent.

These retail funds make up around half of the portfolio’s total assets, which means this move has a significant impact. As a result, fee reductions will lead to savings of around $1500 per year, reducing the overall fees on the portfolio by nearly 20 per cent overnight.

This represents a weekly benefit of around $25 from today. The overall impact is also to lower the total average level of fees on the portfolio to the same level as Vanguard has just moved to – that is, 0.29 per cent.

Following the fairing – trends in credit card expenses

After the tentative reaching of ‘credit card FI’ last month, the same trend of falling average distributions and credit card expenses has continued.

By contrast, on a month on month basis, it can be seen that credit card expenditure continues to increase from the lows of March and April, without yet reaching the long-term average of around $6000 per month.

Progress

Measure	Portfolio	All Assets
Portfolio objective – $2 180 000 (or $87 000 pa)	83.7%	113.1%
Credit card purchases – $71 000 pa	102.2%	138.0%
Total expenses – $89 000 pa	81.9%	110.6%

Summary

It is sometimes difficult to tell whether life and markets are returning to normal, or one is simply adapting to something fundamentally different.

For example, this month the steady application of the investment plan has occurred amongst regular market shifts in sentiment and continuing doubt around the shape of a recovery from the economic impacts of COVID-19.

Following a passively-based investment plan necessarily involves imitation, by some degree, of the range of global investment activity. That is the heart of the passive indexing approach, and it can feel uncomfortably close to dancing until the music stops.

Nonetheless, at such times it is best to focus on what can be controlled. As such, Vanguard’s fee reductions are probably one of the most consequential long-term developments to emerge from this month. This excellent Fire and Chill podcast provides further food for thought on the topic of fees, and how they can best be conceptualised by an investor.

Another thought provoking piece this month came from NYU Finance Professor Aswath Damodaran, with his analysis ‘Sounding Good or Doing Good?’ on whether ethical investing is likely to deliver on some of the claims made on its behalf over the long-term.

Something else that can be controlled – sometimes – is mental approach and awareness. This moving piece in The Atlantic by Arthur C Brooks on dealing with a post-professional life and happiness points out the difficulties some people encounter post a ‘professional peak’.

Similarly, listening to the The Sovereign Individual this month has helped focus on the long arc of history in economics and markets, and the transition phase the entire global economy and society has been encountering over the past two decades.

Such a perspective helps to focus on the signal over the noise. It also serves as a useful warning that while we must exist and invest in the world, and to some degree imitate its common actions, there is no guarantee that this imitation will deliver safety. Others before us suffered from the pretence of knowledge and an ultimately false sense of certainty around what would usually or always work.